EMPOWERMENT OF WHISTLEBLOWERS

In corporate parlance, whistle blowing is a mechanism for employees to raises a concern about wrongdoing occurring in an organization, such as suspected fraud or violation of the company’s code of conduct or ethics policy. In the context of risk management and internal controls, it is a useful management tool which can hunt out information which may or may not surface to the levels where such deviant practices could be flagged, and stopped, thus providing an opportunity for identification and rectification of the problem, without damaging the functioning and/or survival of the corporations.


While the Indian government still has to bring out a comprehensive whistle-blower policy, the Security and Exchange Board of India (SEBI) has set out a model procedure for facilitating whistle blowing in the listed corporations under the Clause 49.

These guidelines are non-mandatory following reservations on the part of several companies, who were apprehensive that the policy could be used to report a number of frivolous cases. However, there are a number of companies who have indeed evolved a whistle blower policy and in some cases; the reporter of misconduct even includes other stakeholders, such as vendors and customers.

Recently, in December 2009, the Ministry of Corporate Affairs (MCA) has issued a Voluntary Guidelines for Corporate Governance, incorporating clause VI for Institution of mechanism for whistle blowing by the companies:

1. The companies should ensure the institution of a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud, or violation of the company's code of conduct or ethics policy.

2. The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Chairperson of the Audit Committee in exceptional cases.

A company’s board and its directors have the responsibility of reducing the damage that any public exposure could bring upon them and as well their companies, their risk management systems should provide for suitable mechanism of facilitation to encourage whistle blowing procedures that would at once encourage adequate confidence in the employees about the confidentiality of the processes and also the fairness and promptitude of follow-up actions on their complaints.

In the US, well published high profile whistle blowing by Sherron Watkins of Enron and Cynthia Cooper of WorldCom, which led to revelation of frauds to the tune of $591 million in Enron and the $3.8 billion in WorldCom.

Aforesaid and other fraud cases, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the securities markets, spurred the US administration to pass the Sarbanes-Oxley Act, 2002 (SOX), which provided legal protection to whistleblowers in public companies. Section 806 of SOX, is intended to protect employees of public companies from retaliation for reporting financial misdeeds, and is administered by the Department of Labor’s (DOL) Occupational Safety and Health Administration.

Section 1107, of SOX Act has provision of strong penalties:

“Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offense, shall be fined under this title, imprisoned not more than 10 years, or both”

Despite a strict ban on various kinds of disciplinary or retaliatory actions against such whistle blowers, such as discharge, demotion, suspension, threats, harassment, blacklisting, etc., the ground realities are quite different and the confidence levels in the systemic protection mechanisms is low.

However, in the recent case, John Kopchinski's six-year legal battle against Pfizer Inc just made him a rich man. Kopchinski and five other whistleblowers have earned more than $102 million in payments from the U.S. government under the False Claims Act through which individuals can reap rewards for exposing corporate wrongdoing. Kopchinski - the Gulf War veteran and former Pfizer sales representative, alone has earned more than $51.5 million as a result of his whistleblower lawsuit against the world's biggest drug maker and the record penalty the company must pay the U.S. government for its massive marketing transgressions. The size of the whistleblower rewards announced is already having an impact worldwide.

According to a recent Fraud Survey 2009 conducted by KPMG, nearly two–third (65%) of the senior executives viewed fraud and misconduct to be significant risks within their industry. These senior executive were most concerned of potential loss of public trust, potential legal fines/ sanctions, and loss of new or existing customers due to frauds.

In an another survey data based on actual fraud cases from the Association of Certified Fraud Examiners, responders opined that frauds were more likely to come to light through whistleblower tips than through audits, controls, or any other means. In addition, employees, who responded to KPMG Forensic’s 2008–2009 Integrity Survey cited Internal Audit as among the least likely channels to which they would feel comfortable reporting misconduct.

The whistle blowing, as an internal control mechanism is yet to come of age in our country. Whistle blowing, in India, still continues to be perceived by many as acts; which are not constructive, a matter of personal vendetta or revenge, intention to embarrass the organization, and so on so forth. On the other hand, the whistleblowers have often faced reprisal, greatly suffered and endured, often for many years, after the complaints have gone unheeded. One of the reasons attributable to this is poor levels of confidence in the ability of the legal and regulatory environment to ensure promised protection against retaliation.

For developing a better corporate governance practices in the country, it is imperative to empower the whistle blowers, the policy concerning them need to be made mandatory, with clear guidelines for prosecuting intimidation of or retaliation against the complainants, including imposition of fines/ penalties for frivolous or mischievous complaints and fast-track disposal of cases along the lines of the Sarbanes-Oxley Act (SOX).